Module No.

1 Consolidated Financial Statement (Ind AS 110)

Module-1 Consolidated Financial Statement (Ind AS 110)
Meaning and Definition- Holding Company and Subsidiary Company, Steps in Preparation of consolidated
Financial Statements, Capital profit, Revenue profit, Non-controlling Interest and Goodwill or Capital
Reserve and Unreleased profit, and mutual indebtedness. Problems on Preparation of Consolidated Balance
Sheet.

Meaning and Definition - Holding Company and Subsidiary Company

A holding company is a company that owns and controls one or more other companies, known as subsidiary
companies, through the possession of a majority of voting rights or equity interests. The primary objective
of a holding company is to manage and oversee the operations of its subsidiaries, rather than directly
engaging in commercial or manufacturing activities itself.
The relationship between a holding company and its subsidiaries is characterized by control. Control is
typically established when the holding company holds more than 50% of the voting rights or equity interests
in the subsidiary. This control allows the holding company to influence and direct the operating, financing,
and investment decisions of the subsidiary companies.
Subsidiary companies are separate legal entities from the holding company, but they are controlled and
managed by the holding company. Subsidiaries may engage in various business activities, such as
manufacturing, trading, or providing services. They operate under the strategic guidance and oversight of
the holding company, which may set policies, appoint directors, and make key decisions for the subsidiaries.

The primary reasons for establishing a holding company structure include:

1. Diversification: A holding company can diversify its operations and investments across multiple
subsidiaries operating in different industries or markets, reducing risk and increasing growth opportunities.
2. Centralized Management: A holding company can centralize the management and decision-making
processes for its subsidiaries, ensuring consistency in strategy, policies, and resource allocation.
3. Legal and Financial Separation: Subsidiaries are separate legal entities, which can help limit liability and
protect the holding company from potential risks or legal issues faced by individual subsidiaries.
4. Tax Planning: Holding company structures can offer tax advantages by allowing for the consolidation of
profits and losses, as well as the potential to shift income or assets between subsidiaries in different tax
jurisdictions.
5. Financing Flexibility: Holding companies can raise funds centrally and allocate resources to subsidiaries
as needed, facilitating efficient capital management and financing opportunities.
Steps: Preparing Consolidated Financial Statements
Step 1: Understand the Purpose and Scope
Before embarking on the consolidation process, it is crucial to grasp the purpose and scope of consolidated
financial statements. These statements combine the financial results of multiple entities within a group into
a single set of financial statements. The goal is to present a true and fair view of the group's financial
position, performance, cash flows, and changes in equity. Consolidated financial statements are typically
prepared by a parent company that has a controlling interest in its subsidiaries, and they serve various
stakeholders, including investors, lenders, regulatory bodies, and internal management.
Consolidated financial statements encompass the parent company and its subsidiaries, which are entities
controlled by the parent company. Control is usually determined by ownership of more than 50% of the
voting shares or the ability to exercise significant influence over the subsidiary's financial and operating
policies. It is essential to consider both domestic and international subsidiaries, as well as special-purpose
entities that may require consolidation based on the applicable accounting standards and regulations.
Sandesh DSouza, Assistant Professor, Department of Commerce, St Philomena’s College(Autonomous) Mysore pg. 1
 Module No. 1 Consolidated Financial Statement (Ind AS 110)
Step 2: Identify Reporting Entities
The next step is to identify the reporting entities that need to be included in the consolidated financial
statement. This involves determining the entities that are controlled by the parent company, either through
ownership of voting shares or the ability to exercise significant influence. It is essential to consider both
domestic and international subsidiaries, as well as special-purpose entities that may require consolidation
based on the applicable accounting standards and regulations.
Identifying reporting entities involves a thorough review of the parent company's ownership interests in
subsidiaries. In some cases, a parent company may have a controlling interest in a subsidiary even without
holding a majority of the voting shares. Control can be established through other means, such as contractual
arrangements or significant influence over the subsidiary's operations. Proper due diligence is necessary to
ensure that all relevant entities are included in the consolidated financial statements.
Step 3: Gather Financial Information
To prepare consolidated financial statements, gather the financial information from each reporting entity.
This includes their trial balances, general ledgers, and supporting documentation such as transaction
records, invoices, and reconciliations. Ensure that all entities follow consistent accounting policies and
practices to facilitate accurate consolidation.
The financial information should be in accordance with the applicable accounting standards, such as
Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
The reporting entities should adhere to the same accounting policies to ensure consistency in financial
reporting. If there are differences in accounting policies among subsidiaries, adjustments should be made
to align them with the parent company's policies.
During the data-gathering process, pay attention to any significant events or transactions that occurred
between the reporting entities, such as intercompany transactions, dividends, loans, or transfers of assets.
These transactions will need to be eliminated or adjusted in the consolidation process to avoid distorting
the financial statements.
Step 4: Eliminate Intra-Group Transactions
Eliminating intra-group transactions is a critical step in preparing consolidated financial statements. Intra-
group transactions refer to transactions that occur between entities within the group. These transactions can
create artificial profits or losses that do not reflect the true financial position of the group. Common intra-
group transactions that require elimination include intercompany sales, purchases, loans, dividends, and
interest.
Eliminating intra-group transactions involves removing both the recorded amounts and any related
unrealized gains or losses. For example, if one subsidiary sells goods to another subsidiary within the group,
the revenue and expense associated with the transaction should be eliminated. This ensures that the
consolidated financial statements reflect only transactions with external parties.
Intercompany account balances, such as receivables, payables, and investments, should also be eliminated.
These balances represent amounts owed or due between reporting entities within the group and do not
represent external transactions.
Step 5: Adjust for Unrealized Gains or Losses
Unrealized gains or losses arise from transactions between group entities where the effects have not yet
been realized through external transactions. For example, if one subsidiary sells goods to another subsidiary
within the group, any unrealized profit on these intercompany sales should be eliminated. Adjustments
should also be made for any unrealized gains or losses on intra-group transfers of non-monetary assets,
such as land or intellectual property.

Sandesh DSouza, Assistant Professor, Department of Commerce, St Philomena’s College(Autonomous) Mysore pg. 2
 Module No. 1 Consolidated Financial Statement (Ind AS 110)
Unrealized gains or losses can distort the financial statements and provide an inaccurate representation of
the group's financial performance. By adjusting for these gains or losses, the consolidated financial
statements provide a more accurate picture of the group's financial position and results of operations.
Step 6: Combine Financial Statements
The next step involves combining the financial statements of each reporting entity into a single set of
consolidated financial statements. This process typically includes consolidating balance sheets, income
statements, cash flow statements, and statements of changes in equity. Ensure that the financial statements
are prepared using consistent accounting policies and practices and that all necessary disclosures are
included.
Combining financial statements requires the aggregation of assets, liabilities, equity, revenues, and
expenses from each reporting entity. The consolidated financial statements should reflect the parent
company's ownership interest in the subsidiaries, and non-controlling interests should be separately
disclosed.
Consistency in accounting policies and practices is crucial to ensure that the financial statements are
comparable and reflect the economic reality of the group. In cases where subsidiaries use different
accounting policies, adjustments should be made to align them with the parent company's policies.
Step 7: Disclose Relevant Information
Consolidated financial statements require comprehensive disclosure of relevant information to provide
transparency and meet regulatory requirements. Disclosures typically include details about the subsidiaries,
the basis of consolidation, significant accounting policies, contingent liabilities, related party transactions,
and any other relevant information specific to the group's activities.
Proper disclosure ensures that users of the consolidated financial statements have access to all relevant
information to make informed decisions. It provides insights into the group's operations, risks, and financial
position. Disclosures should be prepared in accordance with the applicable accounting standards and
regulatory requirements.

Capital Profit and Revenue Profit

Capital profit and revenue profit are two distinct types of profits recognized by companies. Understanding
the difference between these two concepts is crucial for financial reporting, taxation, and decision-making
purposes.
1. Capital Profit:
Capital profit, also known as capital gain, refers to the profit or gain arising from the sale or disposal of
fixed assets or long-term investments. It is a non-recurring and non-operating profit that is not directly
related to the company's primary business operations.
Capital profits can arise from various sources, such as:
- Sale of land, buildings, or other fixed assets
- Sale of long-term investments, such as shares or bonds
- Sale of intangible assets, such as patents or trademarks
- Revaluation of fixed assets or investments
Capital profits are generally considered non-taxable or subject to lower tax rates compared to revenue
profits in many jurisdictions. However, the tax treatment of capital profits may vary depending on the
specific tax laws and regulations of the country or region.

Sandesh DSouza, Assistant Professor, Department of Commerce, St Philomena’s College(Autonomous) Mysore pg. 3
 Module No. 1 Consolidated Financial Statement (Ind AS 110)
From an accounting perspective, capital profits are typically recognized in the statement of profit or loss
as a separate line item or included in other income or other gains/losses. They are not considered part of
the company's regular operating activities and are often disclosed separately for transparency and analysis
purposes.

2. Revenue Profit:
Revenue profit, also known as operating profit or trading profit, is the profit earned from the regular
business operations of a company. It is the profit generated from the sale of goods or the rendering of
services, which constitutes the primary activity of the company.
Revenue profits are derived from the core operations of the business and are calculated by deducting the
cost of goods sold or services rendered, as well as other operating expenses, from the total revenue
generated from sales or services.
Revenue profits are considered recurring and operational in nature, as they are directly related to the
company's primary business activities. They are subject to normal corporate income tax rates, as they
represent the company's primary source of taxable income.
In the financial statements, revenue profits are typically reported as part of the operating profit or income
from operations section of the statement of profit or loss. They are a key indicator of the company's ongoing
profitability and operational performance.

Non-controlling Interest (NCI)

Non-controlling interest (NCI), also known as minority interest, represents the portion of a subsidiary's net
assets and profits that are not attributable to the holding company (parent company). NCI arises when the
holding company owns less than 100% of the equity interests in a subsidiary.
When a holding company acquires a subsidiary, it may not purchase all of the outstanding shares or equity
interests. The remaining shares or equity interests are held by other shareholders, known as non-controlling
or minority shareholders. These non-controlling shareholders have a claim on a portion of the subsidiary's
net assets and profits, even though they do not have control over the subsidiary's operations and decision-
making.
The recognition and measurement of NCI are crucial aspects of preparing consolidated financial statements,
as they ensure that the financial position and performance of the holding company and its subsidiaries are
accurately represented.

Calculation of Non-controlling Interest:

The value of NCI is calculated based on the percentage of ownership held by outside shareholders (non-
controlling interests) in the subsidiary. The formula for calculating NCI is as follows:
NCI = (Percentage of non-controlling interest) × (Net assets of the subsidiary)
Presentation of Non-controlling Interest in Consolidated Financial Statements:
In the consolidated financial statements, NCI is presented separately from the holding company's equity to
reflect the portion of net assets and profits attributable to the non-controlling shareholders.
1. Consolidated Statement of Financial Position:
NCI is presented as a separate component of equity in the consolidated statement of financial position. It
represents the non-controlling shareholders' claim on the subsidiary's net assets.

Sandesh DSouza, Assistant Professor, Department of Commerce, St Philomena’s College(Autonomous) Mysore pg. 4
 Module No. 1 Consolidated Financial Statement (Ind AS 110)
2. Consolidated Statement of Profit or Loss:
In the consolidated statement of profit or loss, the profit or loss for the period is allocated between the
holding company's shareholders and the non-controlling interests. This allocation is based on their
respective ownership interests in the subsidiary.
The recognition and separate presentation of NCI in the consolidated financial statements provide
transparency and clarity regarding the ownership structure and the distribution of net assets and profits
among the holding company and the non-controlling shareholders.

Importance of Non-controlling Interest:

NCI is an important concept in consolidated financial statements for several reasons:
1. Fair Representation: Recognizing NCI ensures that the consolidated financial statements accurately
reflect the ownership structure and the distribution of net assets and profits among all stakeholders,
including the non-controlling shareholders.
2. Transparency: Separate disclosure of NCI enhances transparency by clearly identifying the portion of
net assets and profits attributable to the holding company and the non-controlling interests.
3. Valuation and Decision-Making: The recognition of NCI is crucial for valuation purposes and decision-
making processes, as it influences the calculation of goodwill or bargain purchase gains arising from the
acquisition of subsidiaries.
4. Compliance: Proper recognition and measurement of NCI are required by accounting standards and
regulations to ensure compliance and comparability of financial statements across different entities.

Goodwill or Capital Reserve

Goodwill and capital reserve are two distinct concepts that arise during the acquisition of a subsidiary by a
holding company. These concepts are closely related to the consideration paid for the acquisition and the
fair value of the identifiable net assets acquired.
1. Goodwill:
Goodwill is an intangible asset that arises when the consideration paid by the holding company for
acquiring a subsidiary exceeds the fair value of the identifiable net assets acquired.
Goodwill represents the future economic benefits arising from the acquisition that are not individually
identified and separately recognized. These benefits can include synergies, market positioning, assembled
workforce, or other factors that contribute to the overall value of the acquired business.
The calculation of goodwill is as follows:
Goodwill = Consideration paid for acquisition - Fair value of identifiable net assets acquired
Goodwill is recognized as a non-current asset in the consolidated statement of financial position and is
subject to annual impairment testing. If the carrying amount of goodwill exceeds its recoverable amount
(the higher of fair value less costs of disposal and value in use), an impairment loss is recognized.
The recognition of goodwill is important for several reasons:
- It captures the value of future economic benefits that cannot be separately identified or recognized as
separate assets.
- It reflects the premium paid by the holding company for the acquisition, which may be attributable to
factors such as synergies, market position, or assembled workforce.

Sandesh DSouza, Assistant Professor, Department of Commerce, St Philomena’s College(Autonomous) Mysore pg. 5
 Module No. 1 Consolidated Financial Statement (Ind AS 110)
- It impacts the calculation of non-controlling interests and the allocation of profits or losses between the
holding company and non-controlling interests.
2. Capital Reserve (Bargain Purchase Gain):
A capital reserve, also known as a bargain purchase gain, arises when the fair value of the identifiable net
assets acquired in a subsidiary exceeds the consideration paid by the holding company for the acquisition.
The calculation of a capital reserve is as follows:
Capital Reserve = Fair value of identifiable net assets acquired - Consideration paid for acquisition
A capital reserve represents a gain on a bargain purchase, where the holding company has effectively
acquired the subsidiary at a discounted price compared to the fair value of its net assets.
Capital reserves are recognized as a credit balance in the consolidated statement of financial position,
typically as a separate component of equity or as a deduction from the carrying amount of non-controlling
interests.
The recognition of a capital reserve is subject to careful review and assessment, as it may indicate that
the fair values of the identifiable net assets acquired were understated or that the consideration paid was
lower than expected due to specific circumstances (e.g., a distressed sale or a strategic acquisition).
Both goodwill and capital reserve have implications for the consolidated financial statements and the
allocation of profits or losses between the holding company and non-controlling interests. The recognition
and measurement of these items are governed by accounting standards and require careful consideration
and application of appropriate valuation techniques.

Unrealized Profit
Unrealized profit refers to the profit included in the recorded values of unsold inventory or assets resulting
from intra-group transactions within a consolidated group. Intra-group transactions are transactions that
occur between the holding company and its subsidiaries, or among the subsidiaries themselves.
When a company within the consolidated group sells goods or assets to another company within the same
group, the profit or loss recognized on that transaction is considered unrealized from the perspective of the
consolidated group. This is because the goods or assets are still held within the group and have not been
sold to external parties.
The concept of unrealized profit is important in the preparation of consolidated financial statements because
it ensures that the consolidated group's assets and profits are not overstated. If unrealized profits are not
eliminated, the recorded values of unsold inventory or assets would include profits that have not yet been
earned by the consolidated group as a whole.
Elimination of Unrealized Profit:
During the consolidation process, unrealized profits on intra-group transactions are eliminated to avoid
overstating the group's assets and profits. This elimination process typically involves the following steps:
1. Identify Intra-group Transactions: The first step is to identify all intra-group transactions, such as sales
of goods or assets between the holding company and its subsidiaries, or among the subsidiaries themselves.
2. Determine the Unrealized Profit: For each intra-group transaction involving the sale of goods or assets,
the profit or loss recognized by the selling entity is considered an unrealized profit from the perspective of
the consolidated group.
3. Eliminate the Unrealized Profit: The unrealized profit is eliminated from the recorded values of the
unsold inventory or assets held within the consolidated group. This elimination is typically performed

Sandesh DSouza, Assistant Professor, Department of Commerce, St Philomena’s College(Autonomous) Mysore pg. 6
 Module No. 1 Consolidated Financial Statement (Ind AS 110)
through consolidation adjustments, which involve reversing the unrealized profit recognized by the selling
entity and reducing the carrying amount of the unsold inventory or assets held by the buying entity.
Reasons for Eliminating Unrealized Profit:
The elimination of unrealized profit is necessary for several reasons:
1. Overstatement of Assets: If unrealized profits are not eliminated, the recorded values of unsold inventory
or assets within the consolidated group would be overstated, as they would include profits that have not yet
been earned by the group as a whole.
2. Overstatement of Profits: Failure to eliminate unrealized profits would result in overstating the
consolidated group's profits, as the profits recognized on intra-group transactions have not been earned
through external sales.
3. Distortion of Financial Ratios and Analysis: Unrealized profits, if not eliminated, can distort financial
ratios and analysis, providing an inaccurate representation of the consolidated group's profitability and
performance.
4. Compliance with Accounting Standards: Most accounting standards and principles, such as International
Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), require the
elimination of unrealized profits to ensure accurate and transparent consolidated financial reporting.
The elimination of unrealized profit is an essential step in the consolidation process, as it ensures that the
consolidated financial statements accurately reflect the financial position, performance, and cash flows of
the consolidated group as a single economic entity.

Mutual Indebtedness
Mutual indebtedness refers to the situation where a holding company and its subsidiary have outstanding
balances or transactions with each other, such as loans, receivables, or payables. These mutual balances or
transactions create indebtedness between the entities within the consolidated group.
Mutual indebtedness can arise in various forms, including:
1. Inter-company Loans or Borrowings: A holding company may provide loans or advances to its
subsidiary, or vice versa, creating inter-company loan balances.
2. Inter-company Receivables and Payables: Transactions between the holding company and its subsidiary,
such as the sale of goods or services, can result in outstanding receivables and payables between the entities.
3. Inter-company Investments: A holding company may hold investments in its subsidiary, such as equity
shares or debt securities, creating mutual balances.
4. Inter-company Dividends or Distributions: If a subsidiary declares and pays dividends or distributions to
its holding company, it creates an inter-company balance until the dividend or distribution is received.
During the consolidation process, these mutual indebtedness balances and transactions need to be
eliminated to avoid double counting of assets, liabilities, income, and expenses within the consolidated
group.

Sandesh DSouza, Assistant Professor, Department of Commerce, St Philomena’s College(Autonomous) Mysore pg. 7
 Module No. 1 Consolidated Financial Statement (Ind AS 110)
Elimination of Mutual Indebtedness:
The elimination of mutual indebtedness involves the following steps:
1. Identify Mutual Balances and Transactions: The first step is to identify all mutual balances and
transactions between the holding company and its subsidiaries, such as inter-company loans, receivables,
payables, investments, dividends, or distributions.
2. Eliminate Inter-company Balances: Inter-company balances, such as loans, receivables, and payables,
are eliminated by offsetting the corresponding balances in the consolidated financial statements.
3. Eliminate Inter-company Transactions: Inter-company transactions, such as sales or purchases of goods
or services, dividends or distributions, are eliminated by reversing the corresponding income, expenses, or
equity movements in the consolidated financial statements.
4. Recognize Unrealized Profits or Losses: If inter-company transactions involve the transfer of assets or
goods, any unrealized profits or losses arising from these transactions need to be identified and eliminated,
as discussed in the previous section on "Unrealized Profit."

Reasons for Eliminating Mutual Indebtedness:

1. Accurate Representation of Assets and Liabilities: By eliminating inter-company balances, the
consolidated financial statements accurately reflect the actual assets and liabilities of the consolidated
group, without double counting or offsetting balances within the group.
2. Accurate Reporting of Income and Expenses: Eliminating inter-company transactions ensures that the
consolidated group's income and expenses are not overstated or understated due to transactions occurring
within the group.
3. Compliance with Accounting Standards: Most accounting standards and principles require the
elimination of mutual indebtedness to ensure accurate and transparent consolidated financial reporting.
4. Decision-Making and Analysis: Eliminating mutual indebtedness provides a clear and accurate
representation of the consolidated group's financial position, performance, and cash flows, facilitating better
decision-making and analysis by stakeholders.
The elimination of mutual indebtedness is an essential step in the consolidation process, as it ensures that
the consolidated financial statements accurately reflect the financial position, performance, and cash flows
of the consolidated group as a single economic entity, without the distortion caused by inter-company
balances and transactions.

Sandesh DSouza, Assistant Professor, Department of Commerce, St Philomena’s College(Autonomous) Mysore pg. 8